Freeze UK public spending for five years to achieve growth

Mark Littlewood

12 March 2013

British Chancellor George Osborne and United Kingdom Prime Minister David Cameron received a timely reminder today that their tough-sounding rhetoric about getting the nation's public finances under control is not being matched by the brave policies actually needed to achieve this aim. Speaking at the Institute of Economic Affairs in London this morning, their former Cabinet colleague Liam Fox called for a more radical plan to tackle the deficit and to encourage economic growth.

For all the misleading bravado from senior ministers about 'paying down the debt', the truth is this government intends to add an eye-watering £600bn to the national debt over the course of this parliament. That is an overspend of around £10,000 for every man, woman and child in the country. If that counts as austerity, one dreads to think what largesse would look like.

Fox advocates an absolute freeze on public spending for as long as five years. Before anyone claims this sounds like an impossible task, it is important to put the current levels of government expenditure into historical context. The last Labour government oversaw a staggering increase in the size of the state – with nominal spending more than doubling from around £300bn in 1997 to nearly £650bn when Gordon Brown left office in 2010.

After such steep and generous rises in spending, surely it is not unreasonable to hit the pause button for a few years. The Fox plan could save as much as £345bn over five years, providing room for desperately needed tax cuts. Fox himself suggests encouraging inward investment through a temporary reduction in capital gains tax to 0 per cent. Whenever a tightening of spending is proposed, concerns are usually raised that the consequence will be that the most vulnerable in society will suffer the most.

But in reality, the problem is that we use our colossal welfare budget in a scattergun, untargeted fashion. Welfarism has spread to such an extent that increasingly few people find themselves wholly ineligible for some sort of state hand-out. Recent research shows that the bottom 20 per cent of households rely on the government for more than half of their income. These, presumably are the very sort of people that the welfare state is designed to help.

Extraordinarily though, the next poorest 20 per cent of households are given about the same in state hand-outs as they earn privately. Even the middle 20 per cent receive around a quarter of their income in welfare payments. The welfare state was not designed to help those in the middle range of incomes. If the money really was targeted at the poorest in society, we could no doubt achieve better results in relieving poverty for a considerably smaller outlay.

Of course, a serious approach at tackling poverty requires the government to consider the impact of their policies on pushing up housing prices and the costs of fuel, energy and food. But Fox is surely right to question how on earth we ever managed to arrive at a situation in which welfare support is provided to households with incomes in excess of £60,000 or in which low paid workers are paying for cold weather payments to pensioners living in the Costa del Sol.

We would be better to do away with universal entitlements and use the savings to reduce the tax burden. Sadly, the UK government seems unwilling to pursue a more radical course. It remains committed to spending reductions of just 1 per cent per annum and a swelling of the national debt. If politicians stick to this rather feeble strategy, the economic growth for which they so desperately yearn may continue to elude them.

Dear Mr Littlewood
"If politicians stick to this rather feeble strategy, the economic growth for which they so desperately yearn may continue to elude them."
By their acts shall they be judged. I don't see our politicians, or at least any with any power, desperately yearning for economic growth. Instead I see a total disregard for the economy. It, after all, is only for the little people; those wielding power can take as much as they like from whatever the little people produce, who can be left to starve if necessary.
DP

Submitted by David L. on Fri, 15/03/2013 - 12:10.

Oh yes, use nominal figures because that makes the numbers look bigger. It's utterly wrong, but it supports your argument. The inability of economists to distinguish between stocks and flows (again, mostly when it suits them) also never ceases to amaze me. Austerity is austerity because it is a change in a flow (deficit), not a stock (debt).
I thought the idea of expansionary austerity had been killed, given the vast amounts of empirical data from the last 5 years. Apparently not.

Submitted by Jim Clark on Fri, 15/03/2013 - 16:37.

Was it necessary to engage a leading Tory parliamentary expense cheat and ministerial incompetent to speak on such an important issue?
Such bad errors of judgement can only do damage to the IEA

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